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Charter Said to Prepare Offer for Time Warner Cable

Charter, the fourth-largest U.S. cable company, is attempting to buy Time Warner Cable, the second-largest U.S. cable provider, to gain leverage in future programming discussions with TV networks. Photographer: Patrick Fallon/Bloomberg

(Corrects location of analyst in third paragraph of story
dated Dec. 13.)

Dec. 13 (Bloomberg) -- Charter Communications Inc. is
preparing an offer letter to acquire Time Warner Cable Inc. for
less than $135 a share, according to a person with knowledge of
the matter.

Charter will offer cash and stock, in a so-called bear-hug
letter to Time Warner Cable as early as next week, according to
the person, who asked not to be identified because the
negotiations are private.

Charter, the fourth-largest U.S. cable company, could
generate as much as $1 billion in annual cost savings with
better deals on programming and by cutting overhead, said
Matthew Harrigan, an analyst with Wunderlich Securities Inc. in
Denver. Still, it would be risky for the company to bid too high
for Time Warner Cable, which is losing video subscribers to
competitors including AT&T Inc.’s U-verse and Verizon
Communications Inc.’s FiOS.

“Time Warner Cable continues to lose subscribers and
customer service issues continue to be deteriorating,” Harrigan
said in a telephone interview. “It’s not going to be easy to
fix.”

Time Warner rose less than 1 percent to $131.41 at the
close in New York. The shares have gained 35 percent this year
on speculation that a takeover bid is coming. Charter fell less
than 1 percent to $131.54.

Customer Losses

Time Warner Cable lost more video subscribers than any
other major cable company in the most recent quarter, dropping
304,000 customers in the period, according to data compiled by
Bloomberg. While a dispute with CBS added to the losses, that
compares with a loss of 27,000 video subscribers at Charter and
129,000 fewer video customers at Comcast Corp. in the same
period.

Time Warner Cable is still expanding its residential
Internet and phone businesses, and business services revenue is
set to double over the next four or five years, according to the
company’s forecast. The New York-based company would probably
accept a bid of $150 to $160 a share, a person familiar with the
matter said earlier this month.

Valuation Estimates

A bid of $135 a share would value Time Warner Cable at
about $62 billion, including the value of its debt. That’s about
7.5 times estimates for its 2014 earnings before interest,
taxes, depreciation and amortization of $8.24 billion, data
compiled by Bloomberg show. Charter currently trades at a
multiple of 8.7 times estimated 2014 Ebitda, while Comcast
fetches 7.5 times, the data show.

Charter acquired Optimum West, a division of Cablevision
Systems Corp., for $1.63 billion earlier this year, a multiple
of about 8 times 2013 Ebitda, the data show. A bid of 8 times
2014 Ebitda would value Time Warner Cable at $149 a share.

Harrigan estimates Charter can offer $96 per share in cash
with the rest coming in Charter stock. Charter is raising about
$25 billion in financing for its bid, according to people
familiar with the situation. John Malone, Charter’s largest
shareholder with a 27 percent stake through his holding company
Liberty Media Corp., has publicly advocated for cable
consolidation.

“Liberty and Charter have an advantage here in that their
offer will have a heavy cash component,” he said.

Comcast Plan

Comcast and Cox Communications Inc. are not part of
Charter’s offer, two people familiar with the terms said.
Comcast, which had discussed a joint bid that would have it
split up the assets with Charter, is monitoring Charter’s moves,
they said.

Spokesmen for Charter, Comcast, Cox and Time Warner Cable
declined to comment.

Comcast is waiting to see how Time Warner Cable reacts to
Charter’s bid, one of the people said. Time Warner Cable could
agree to a deal with Charter including a low breakup fee and the
option to solicit other offers, allowing it to negotiate with
other suitors, the person said.

That would give it a floor to any rival bid. Another option
is to negotiate closely with Charter without signing up a deal
in hopes other cable operators, including Comcast, make a rival
bid, the person said.

Comcast could be interested in owning the cable assets of
New York, Los Angeles, or both, according to Craig Moffett, an
analyst at MoffettNathanson LLC. Comcast owns assets in
California, as well as in the Eastern U.S.

“I wouldn’t be surprised if Comcast comes in to do a
systems swap with Charter,” Harrigan said, referring to the
possibility that the two cable companies could exchange
geographic areas so that both could end up with contiguously
placed markets that would be easier to service.